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A stock option in which you must exercise the option after the price of the stock has appreciated by a specific amount since the grant.
Example: Your exercise price is $10 per share. You must exercise when the stock price increases by 400%, to $40.
For companies with more volatile stock prices, such as those in the biotech industry, capped options can have a lower earnings charge than traditional stock options. The discount in the valuation for capped stock options increases as the expected volatility increases. In addition, if the cap is set at a level that still produces an attractive return, it does not affect the grants' perceived value to employees. Capped options are also sometimes called barrier options.
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